When Mike Schwartz, 40, walked into an ailing Harley-Davidson
motorcycle dealership in 1992, he could smell the opportunity. The
dealership was located in a part of Wilmington, Delaware, that had
seen better days. And when he was told the bike he ordered would
take two years to arrive, it was clear service was a problem.
Management, a throwback to an era that owed more to the racing
circuit than the business circuit, didn't seem to have its
heart in the business anymore. Schwartz told the owner to contact
him if he ever wanted to sell.

Two years later, in the winter of 1994, Schwartz got a call from
the owner, who was ready to unload the business. Schwartz bought
the company, which consisted of a note from the seller and about
$300,000 in equipment and inventory, for less than $1 million.
Working as both owner and general manager,Schwartz returned the
dealership to robust health within a year and a half, a period
during which the Harley nameplate enjoyed a popular resurgence.

But he didn't have long to rest on his laurels. His lease
was set to expire, and Schwartz was about to make some big
decisions.

Rather than staying put, or moving to the other side of town,
Schwartz set out to create a "destination" dealership. To
realize his vision, Schwartz bought land in nearby New Castle,
Delaware, razed the existing buildings, and started building from
the ground up. The result was Mike's Famous Roadside Rest, a
42,000-square-foot complex complete with a restaurant, dealership
and museum, all just off the main artery of the northeast corridor
of Interstate 95.

And a "destination" is exactly what it became. On some
weekends in the spring of 1999--the dealership's first spring
season since completion--upwards of 5,000 Harley faithful (as well
as the merely curious) made the pilgrimage to Mike's Famous to
bask in the glow of one of America's great cultural icons.

No Guts, No Glory

But vision takes guts. Schwartz displayed his by taking out a $6
million loan from the financing arm of Harley-Davidson to bring his
vision to fruition. And while things look great today, that can
change overnight, and Schwartz is well aware of the risks.
"Harleys," he says, "are essentially a luxury item,
not a primary means of transportation. Rises in interest rates or a
change in economic conditions could significantly change the demand
for our product." Or, he adds, the cyclical nature of the
market could turn against him before the business is ready to
handle it.

So what happens to entrepreneurs who take out a business loan
under one set of circumstances, only to have things turn bad down
the road? Do they have to lose their business? That depends on how
well the entrepreneur manages the process of a so-called loan
workout with the lender, says A. Barry Cappello, a borrower's
rights attorney in Santa Barbara, California, who has more than 19
years' experience representing businesses.

Prep Time

Cappello says that approaching the bank about a loan workout
assumes the bank is ready to deal when you're in trouble.
Unfortunately, what you may find when you inform your lender
you're anticipating money problems is that the bank may call in
your loan early. If this happens to you, a loan workout is probably
no longer an option and you may have to seek a legal remedy against
promise to pay the lender to protect yourself.

In truth, however, most lenders don't want to foreclose on a
loan. A foreclosure involves litigation. There may be environmental
liabilities involving repossessed property. Collateral will have to
be sold at fire-sale prices. Indeed, the situation can be a lot
harder for the bank than simply working out new terms with the
borrower.

Before even suggesting a workout to your lender, however,
you've got to decide whether the problem that's making your
loan difficult to repay is temporary or permanent. If the problem
is permanent, the workout may not help, and bankruptcy may be your
only alternative. But if the problem is temporary, you've got
wiggle room.

The first step in the process is to meet with the lender to let
it know you see a problem coming and that some changes to the loan
will be necessary to prevent the situation from getting worse.
"It's important to talk to the lender as soon as you
can," says Cappello. "Obviously it's better to see a
tidal wave on the horizon than it is to see it on the
beach."

Letting the lender see the stark reality, however, might spook
it into moving against you. Cappello suggests two strategies to
prevent this.

First, let it drop in the initial meeting that you've met
with counsel, and based on financial projections, he or she thinks
a workout is viable. It's the old velvet hammer.
"Basically," says Cappello, "by meeting with counsel
and letting the lender know it, you're telling [the bank] you
have the ability and the inclination to fight a
foreclosure."

Now that you have your lender's attention, it's time for
step two: Bring to the meeting a financial forecast showing what
sales you expect the business to generate during the next year or
next several quarters, how you plan to cut back on costs and how
the bank can help. And don't forget to document your financial
assumptions with footnotes.

Zigs And Zags

After getting your lender ready, there are a number of different
kinds of workout structures you can propose. So-called skips are
the easiest to understand. They're just what they sound like,
an agreement to skip a negotiated number of payments. If the
problem is small, you may only have to skip three payments. If the
problem is thornier, you might try to negotiate a six-month
skip.

Another tack is to get the loan recast. An 11 percent five-year
loan for a $250,000 principal balance will cost a borrower $5,345
per month in principal and interest. Let's say, after a year,
when the balance is $211,455, the borrower runs into trouble. If
the loan is recast, say, with a seven-year term, a tough but
attainable time frame, then the monthly payments would go down to
$3,620. One point to keep in mind about recasting: A lender may not
want to do it, but it may still be preferable to writing down the
value of a loan on its books. You've got to use your persuasive
powers to get the lender to agree.

As part of a workout, you might promise to pay the lender off in
a few months with the proceeds from another loan or equity
financing. In return, you get some breathing room to try to solve
your financial problem or to find another lender. Of course, if
you're in trouble with one lender, why would another step up to
the plate? Because there are all sorts of lenders with differing
appetites for risk. What makes one lender shriek may be just the
kind of deal another lender is looking for.

Finally, Cappello says the gutsiest move you can make is to ask
for over-advance financing. In short, what you're doing is
asking for more money--at a time when you're having trouble
paying what has already been borrowed. Crazy? Maybe. But there may
be several plausible situations--say, if a big overseas customer
delays, but doesn't cancel, a large order--when an additional
dollop of working capital can make the whole problem go away.

Of course, none of this is going to come cheap. You can pretty
much count on your lender giving you the cold-blooded squeeze,
which is fine as long as you don't take it personally. Cappello
says that, as the result of a workout, you can expect to pay points
and a higher rate of interest, and to surrender more collateral.
Points are usually added to the balance of the loan and are often
calculated on the amount of foregone payment the lender is
enduring. For instance, if you're skipping six months of
payments at $10,000 per month, expect to pay one to three points on
the $60,000 you'll owe.

As for a higher interest rate, you shouldn't balk too much
(unless rates have come way down since you took out the loan)
because you have in fact proven your business loan to be more
risky. Cappello says you should never offer to pay a higher
interest rate because the banker will get around to raising it
sooner or later anyway. Just be prepared for it and recognize that
if you are trying to reduce costs, and the lender is trying to help
you get there, there's a price to pay somewhere down the
road.

Although the process is never pleasant, Cappello says the
resolution should be satisfying to all. "In a good
workout," he says, "the borrower gets over the hump, the
business gets back on track and the lender still has a
borrower."

Over at Mike's Famous Roadside Rest, Schwartz is pretty
comfortable. Projected sales of $12 million for his dealership--a
figure presumably upon which the loan was negotiated and
approved--turned out to be conservative. Schwartz estimates
he'll do nearly $20 million in his first full year. Still, he
says, you just never know what the future might bring.

David R. Evanson's newest book about raising capital is
called Where to Go When the Bank Says No: Alternatives for
Financing Your Business(Bloomberg Press). Call (800) 233-4830
for ordering information. Art Beroff, a principal of Beroff
Associates in Howard Beach, New York, helps companies raise capital
and go public and is a member of the National Advisory Committee
for the SBA.